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  <h1> Investment section</h1>

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Investment is definitely gonna be examined.

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      The question could be like: if the investor is investing in the money market/bond market/equity market/property,
     what factors should they bear in mind?
     <br />
      All the asset markets are affected by:
      <ul>
        <li>
          The relative attractiveness of other assets. All the assets are highly substitutional.
        </li>
        <li>
          Change to asset rules/regulation regimes
        </li>
        <li>
          Institutional funds available for the investment market (if institutional investors have an inflow of funds, then would invest them in ...)
        </li>
        <li>
          Political climate: People will go to safe assets (golds), if the politic is unstable.
        </li>
      </ul>
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  <p>
    The short-term interest rates can be affected by government actions, inflation, exchange rates and economic activity
    .
  <br />
    And the interest rate can affect inflation level, exchange rates and the level of economic activity.
  </p>
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      <figure>

          <ul class="tree">
              <li><code>Government Actions</code>
                 <code>Inflation</code>
                 <code>Exchange rates</code>
                 <code>Economic activity</code>
                  <ul>
                      <li><code>Interest rates</code>
                      </li>
                  </ul>
              </li>
          </ul>
      </figure>

      <div class="tagtag">
        <p>
          Try to ponder each of these relationships, before consulting the answers
        <ul>
          <li>
            Government actions:
            Short-term interest rates are a key tool in attempting to meet
            (often conflicting) policy objectives such as:
            <ul>
              <li> encouraging economic growth: lowering interest rates will encourage both investment
              spending by firms and consumer spending
              .thus, interest rates are often cut to help an economy move
              out of recession
              </li>
              <li>controlling inflation: prolonged low (real) interest rates can increase
                          the money supply … leading to a rise in price inflation
              </li>
            </ul>
          </li>
          <li> Low interest rate -> depreciation. <br />
            Low interest rates are also likely to put a downward pressure on exchange rates. international investors are
            less inclined to deposit
            money in the country, which
            reduces demand for the
            domestic currency
          </li>
          <li>
            Low interest rate -> higher inflation.  <br />
            higher import prices leads
            to higher costs for
            companies, which are then
            passed on to consumers
            through higher prices.
          </li>
          <li>Higher inflation is likely to lead to a rise in short-term interest rates (as, otherwise, there is no incentive to save money in the short term).
          </li>
          <li> fall in the domestic currency -> higher interest rates
            The fall in the domestic currency is likely to reduce the demand for cash instruments from overseas investors (as the payments received will be worth less in the investor’s own currency).
            This fall in demand may lead to a fall in the price of money market instruments and, hence, a rise in short term interest rates.
            <br>
            <span class="highlight">
             In addition, short-term interest rates may be increased still further to help defend the domestic currency. </span>
          </li>
          <li>a fall in the domestic currency is likely to lead to cost-push inflation
          </li>
        </ul>
        </p>
      </div>
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    The interest rate, expected inflation level, exchange rates and economic growth are the four macroeconomic factors
    that could influence the bond market, equity market and the property market.

      <figure>
          <ul class="tree">
              <li><code>Interest rate</code>
                <code>Inflation / Expectations of inflation</code>
                <code>Exchange rates</code>
                <code>Economic growth</code>
                  <ul>
                      <li><code>Bond</code></li>
                        <li><code>Equities</code></li>
                        <li><code>Property market</code>
                        <ul>
                          <li>
                            <code>Occupation market</code>
                          </li>
                          <li>
                            <code>Investment market</code>
                          </li>
                          <li>
                            <code>Development cycles</code>
                          </li>
                        </ul>
                      </li>
                  </ul>
              </li>
          </ul>
      </figure>
      Try to ponder each of these relationships, before consulting the answers
      <ul>
        <li>
          Interest rate
          <ul>
            <li> Short-term interest rates influence yields and required rate of returns.
            </li>
            <li>
              Yields on short-dated bonds will be closely related to
              returns on money market investments … thus, a rise in
              short-term interest rates will lead to a fall in the price of
              short-dated bonds
            </li>
            <li>
              The effect of such a rise on yields on long-dated
              bonds is not clear-cut. Expectation theory: higher short term interest -> higher long term yields.
              Higher short term interest -> Lower inflation level -> lower yield.
            </li>
            <li> Equity: lower real interest rates should stimulate economic
            activity and lead to a rise in future corporate profitability
            </li>
            <li>
              also, lower real interest rates → required rate of return
             lower → PV of future dividends will rise
            </li>
            <li>
              higher real interest rates can be expected to lead a lower PV of future rental income
            </li>
          </ul>
        </li>
        <li>
          Inflation / Expectations of inflation
          <ul>
            <li>
              inflation erodes the real value of coupon and redemption payments. thus, expectations of higher inflation in future will lead to a
              rise in bond yields (and a fall in bond prices)

            </li>
            <li>This fall may also be exaggerated by: • a reduction in the demand for such investments from overseas investors (as the fixed monetary payments are now worth less in the investor’s own domestic currency)
            </li>
            <li>a rise in inflation may lead to fears of a recession in the economy … which could lead to an increase in government borrowing and/or an increased risk of default
            </li>
            <li>
              even when inflation is not expected to rise, an increase in
              uncertainty about future inflation will lead to a rise in the
              inflation risk premium (and, hence, a rise in bond yields)
            </li>
            <li>
              equity prices should be largely unaffected by rises in price inflation.
              corporate profits (and, hence, dividends) can be expected to rise in
              line with inflation. thus, equity prices will rise in nominal terms
              (leaving the real return achieved largely unaffected).
            </li>
            <li>
              high and more uncertain inflation will reduce
              demand for FIBs and may increase demand for real assets.
            </li>
            <li>

              Property returns have been a good hedge against price
              inflation in the long term … as freeholders should be able
              to increase rent in line with inflation (to maintain the real
              value of the income and capital)
            </li>
          </ul>
        </li>
        <li>
          Exchange rates
          <ul>
            <li>
              expectations of a
              strengthening in the domestic currency will increase the
              demand for bonds from overseas investors
            </li>
            <li>
              The impact on equity market is not clear cut. It depends on  the structure of the individual market and will be more
              important for countries where international trade and
              capital flows are more important.
            </li>

          </ul>
        </li>
        <li>
          Economic growth
          <ul>
            <li>
              expectations of higher real economic growth will have a major impact on equity markets.
            </li>
            <li>
              as economic growth increases, demand for commercial
              and industrial properties will also rise (leading to higher
              rents and property values)
            </li>
          </ul>
        </li>
      </ul>
    </div>
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       Other points:
       <ul>
         <li>
           an increase in the level of government borrowings is likely
          to lead to an increase in the supply of bonds (which will
          lead to a fall in bond prices and, thus, a rise in bond yields)
         </li>
         <li>
           the effect of this will depend on both the type of bonds
           issued (i.e. fixed-interest or index-linked) and on the
           duration of the bonds issued
         </li>
         <li>
           alternatively, the fiscal deficit could be covered by either
           selling Treasury bills or printing money
         </li>
       </ul>
       The inelasticity of supply is the main factor creating development
       cycles.
       <ul>
         <li>
           development time lags
         </li>
         <li>
           fixity of location
         </li>
         <li>
           restrictive planning permissions
         </li>
       </ul>
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  <p> Author: Mengke, Lyu</p>

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